We don?t even have Plan A

As the summer ends, the eurozone crisis is worse than it was at the beginning.

The financial markets don?t see an end in sight and the key players are locked in to domestic positions that are fundamentally in conflict. There is hardly any ?European? leadership as such, only a set of national politics founded on populism or impotence. In this situation, there is no common definition of ?success? or ?failure? for the eurozone. Critics say it is doomed and the international media are ready to report a Greek default at any point now. The system is teetering on the brink: We watch national parliaments as they vote on last July?s rescue plan — something the markets no longer believe is enough.

Options come and disappear. In any sensible monetary union there would be a central fiscal authority issuing common European bonds and a European version of the International Monetary Fund with a large funding reserve. But Chancellor Angela Merkel says no to Eurobonds and the German Constitutional Court has reduced her room for maneuver.

The shaky vote last Thursday in the Bundestag hardly inspires more confidence for the future.

We?re in this mess of no agreed, plausible solution because no one agrees who the winners and losers should be. To agree is to answer big questions about the role and purpose of the European Union, the future economic model and the position of finance within it, and what to do about states that are failing.

Europe?s ineptitude is paralleled by pain and disarray in Greece. Voters expect a default and lack confidence in the major parties to offer a way out of the crisis. In the recent polls, almost as many were ?undecided? as supported both PASOK and New Democracy combined. The ability of the state to do its job and collect taxes is in even more serious doubt. The state administration is an old Trabant car, not a BMW or VW. To compound this, the Public Power Corporation union said it will not collect the new property tax.

The European and the domestic dimensions are intertwined, of course. The level of pain endured in Greece is set by the bailout and a sense of progress rests on having an agreed sense of future direction and commitment. But Europe has offered Greece an uncertain bargain.

The pendulum has now swung even more strongly as politicians across Europe have lined up to assert that Greece should just get on with it. The new emphasis is on protecting Europe?s banks from the contagion of a Greek default. In a contest between helping ?lazy? Greeks or ?reckless? bankers, it is a sign of how tolerance has shifted.

Whereas last year the justification for Greece?s first bailout was that it could not be allowed to default and had to stay in the euro, now the idea floated at the IMF last weekend is a default within the eurozone. Certainly, an uncontrolled default would be a journey into economic chaos for Greece and no sensible Greek should advocate an exit from the eurozone.

Increasing the default that Greece?s creditors have accepted so far — to a haircut of 50 percent — could offer major fiscal relief to the Greek state. It could borrow less and ease the austerity. But the big unknown would be the risks to both domestic banks and to the banks elsewhere in the eurozone exposed to Greece?s debt.

It is inconceivable that such a package would not guarantee the savings of ordinary Greeks in the event of a default: EU rules have normally protected them up to 100,000 euros. Yet the wider effects are more difficult to predict, let alone control. How many banks would be allowed to fail? We all know where banking crises can lead.

EU Commission President Jose Manuel Barroso has become increasingly exasperated with Merkel?s rigidity. Last Wednesday, he backed a Tobin tax on financial transactions to provide extra funding, an idea favored by French President Nicolas Sarkozy and German Finance Minister Wolfgang Schaeuble. This might yield 57 billion euros by 2014. Unfortunately, this attractive idea may be wrecked by a veto by British Prime Minister David Cameron.

But the problem is not with Plan A or Plan B; it?s that the financial markets cannot discern any plan from Europe. Leaders are hemmed in, boldness is in short supply and solidarity is out of fashion. UBS research in London has estimated the devastating costs if the euro was to collapse, even for Germany.

Paradoxically, it?s the Anglo-Saxons advocating a bold and urgent plan and the continentals settling for tinkering without commitment. Merkel?s gradualness and her slowness in educating her own voters have not helped so far.

Her partners should be very wary of her lead.

* Professor Kevin Featherstone is head of the European Institute at the London School of Economics.